NZD/USD recovers further from YTD low amid risk-on mood, upside potential seems limited
- NZD/USD staged a modest recovery from a fresh YTD low touched earlier this Tuesday.
- The risk-on mood benefitted the perceived riskier kiwi amid a modest USD weakness.
- Hawkish Fed expectations should limit the USD downside and cap gains for the major.
The NZD/USD pair built on its steady intraday recovery from the YTD low and climbed to a fresh daily high, around the 0.6775 region during the early European session.
Following an early dip to the lowest level since November 2020, the NZD/USD pair witnessed a short-covering move from the 0.6735 area and was supported by a combination of factors. The upbeat market mood undermined the safe-haven US dollar and was seen as a key factor that provided a modest lift to the perceived riskier kiwi.
The global risk sentiment stabilized amid the recent reports from South Africa that Omicron patients had only shown mild symptoms. This helped ease fears about the economic fallout from the new variant of the coronavirus and boosted investors' confidence, which was evident from a generally positive tone around the equity markets.
Meanwhile, the prospects for a faster policy tightening by the Fed might continue to act as a tailwind for the greenback and keep a lid on any further gains for the NZD/USD pair. Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures.
Hence, any subsequent move up is more likely to face stiff resistance and runs the risk of fizzling out rather quickly near the 0.6800 mark. This makes it prudent to wait for a strong follow-through buying before confirming that the NZD/USD pair has bottomed out and positioning for any meaningful recovery in the near term.
Technical levels to watch